Mgt411 Assignment No. 1 Solution

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Semester "Fall 2010"

"Money & Banking (MGT411)"

Assignment No. 01                                                   Marks: 15

Question no 1

 

Part (a)

On 01 January 2010 JS Group want to issue bonds in the capital market having

face value Rs.1, 000 with coupon rate of 10% (semi annually and 15 years

maturity). Investor required rate of return in this scenario is 12%.

You are being the student of finance know the worth of fundamental methods of

valuation; therefore you are required to calculate the present value of the bond by

utilizing the fundamental methods.

Part (b)

The bond of JS Group is traded in the Karachi Stock exchange for Rs.950. The

par value of the bond is Rs.1, 000. The coupon rate is fixed at 12 % paid annually.

This bond will be matured after 03 year. What will be (YTM) of this bond?

Part (c)

EFU, an insurance company, wants to plan a new service to its policy holders.

During the meeting of executives, CEO offered a plan of house insurance. The

summary of estimated cash flows which were discussed in that meeting is:

· This project will need Rs.05 million as initial investment

· In the first year company will receive Rs.02 million as premium from the

policy holders.

· In second year, company expect to receive Rs.2.5 millions as premium

· In third year company estimated that it will have to receive only Rs. 01

million because there will be a earth quack in that period, as probability of

having earth quack is more than 80% as predicted by geologists.

· In the fourth year the company estimated to get Rs.1.5 million after clearing

the insurance claims of the policy holders.

· In fifth year they expect to receive only Rs. 0.5 million

Calculate the IRR of above mentioned plan by trail and error method?